Allied Bank Limited: Analysis of Financial Statements Fiscal Year 20003 - September 2007
Allied Bank Limited was established in 1942 in Lahore. It is one of the largest banks operating in Pakistan with more than 700 branches in almost 300 cities and towns. The bank offers a full range of retail, commercial and corporate banking services with a focus on service delivery through technology.
In addition, it also provides general banking services to agricultural, industrial and individual customers all over the country. Almost 89% of the bank's deposit base is composed of deposits from the urban areas. The bank's fundamental strengths lie in its strong lending capability, as well as providing a variety of financial services, which has enabled it to diversify and enhance its deposit base.
The bank also conducts international operations in UK whereby it caters to the needs of the bank's domestic corporate and other customers in financing import and export transactions. Here, ABL's products include foreign letters of credit, guarantees, remittances, acceptances and collections.
Analysis of financial performance (December '03-September'07)
The earnings profile of the bank shows a marked improvement over the period under consideration. These have been mainly achieved through considerable improvements in equity and profits of the bank. Its interest and non-interest income continued to grow. The bank's performing advances were higher this time. Though the yield on the earning assets grew, this was offset by a higher cost of funding that increased by about 54%. In spite of that and the decline in banking sector spread, the bank's profitability picture remained positive, indicating the bank has prudent policies for handling its deposits, advances and investments. Of the non-interest income, the highest increase came from fee, commission and brokerage, as well as income from the purchase and sale of securities. The bank is likely to continue its growth momentum in the future. Its earnings per share for the year ended 2007 are predicted to be somewhere around Rs 13-14.
Asset quality had greatly improved over the years, manifesting the fact that the bank maintains its credit risk tactfully and has well diversified credit portfolio that reduces large exposures tremendously. The bank's asset quality ratios have shown a remarkable downward trend, which translates into, enhanced asset quality.
The bank registered a marginal increase of 2.6% over the last year. Nevertheless, the bank has been able to contain the growth of its NPLs. This reflects a sound credit policy that has resulted in higher performing advances. Consequently, the bank also lowered its provisions for the NPLs, enabling greater amount of funds available for earning purposes. It can be said that in response to higher costs of obtaining funds, the bank has utilised its advances very efficiently.
The debt management has improved considerably over the years especially from their precarious situation experienced in 2003. This improvement has been complemented by an impressive asset management approach. The debt ratios have declined, indicating increasing equity portion of the bank's assets. Generally, this has been the trend in the entire banking industry perhaps due to higher interest rates resulting in higher cost of borrowings and the MCR requirements as proposed by the State Bank.
Continuous expansion in Pakistan's economy, growth in per capita income, and rising interest rates for time deposits were the main reasons for the continued increase in the deposits in the 9 months. As is the entire banking industry experiencing, the composition of the deposits is shifting from fixed deposits to savings deposits. This is poised to generate a higher return.
All the liquidity ratios of the bank have been maintained at favourable levels. Hence, the bank is to be in a comfortable position to guard against any credit risks, any run on deposits or any significant increase in its NPLs.
Other than customer's deposits, the bank's funding source is the interbank money market. Change in the government monetary policy and market expectations of interest rate are all important factors that can adversely affect Allied's key funding source. The earning assets of the bank have been growing all throughout. Higher deposits are being streamed into greater advances, investments and lendings, all generating a higher return. The cost of funds is rising parallel to the yield, however, at a much lower level.
This liquidity consistency may be attributed to the excess liquidity that prevailed in the industry due to high reserve growth of the banking sector.
While expanding the advances portfolio, efficient portfolio diversification has been a key consideration of Allied, always. This diversification has taken into account the volatility of various sectors by placing concentration limits on lending to these sectors, thereby ensuring a diversified advances portfolio. The bank has the greatest investments in government securities, followed by in listed companies and then mutual funds. The government securities (mainly PIBs and T-Bills) are considered liquid and availing less risk.
The solvency ratios of the bank have persistently shown an upward trend throughout 2003-2006. This indicates bright prospects of long-term sustainability of the bank. The solvency ratios for the last three years have been maintained in the vicinity of each other. The increasing equity portion of the bank explains this. This may be regarded as a move against the rise in deposit rates and a decrease in the banking spread of the banking sector. This healthy trend in solvency may be predicted to continue in the future.
The market value of the bank continues to remain high. The bank was listed on the stock exchange only in 2005. Hence, 2003 and 2004 show no values for the market value ratios.
The company has been a consistent distributor of dividends. The increased profitability of the banking sector (an increase of around 100%) has made this sector one of the most lucrative ones to invest. This increasing marketability profile is reflective of Allied's high yields on earning assets and favourable liquidity and solvency positions. We may expect such trend to continue into the future.
The bank has maintained its reputation as one of the consistent payers of dividends. The high share price of the bank is accountable for this trend. The profits are likely to increase for the year-end 2007, resulting in greater EPS for the bank. This is expected to improve the 9 months figure for the dividend payout ratios.
FUTURE OUTLOOK:
The future prospects certainly seem bright. With its performing advances increasing, healthy profit can surely be expected of the bank. Moreover, its prudent asset management and a diversified credit portfolio will play a big role in enabling it to contend in the scenario of intense competition. The equity base is likely to see further expansion in the coming years.
This will ensure adequate loan coverage for the bank and profitability for its shareholders. The shareholder returns are also likely to go up as the bank is expected to turn out even greater profits. The Allied share is currently trading at Rs 130.15. The share price of the bank has been increasing and such trend of price appreciation is to continue.
In order to strengthen bank's Tier II capital, as required by the State Bank of Pakistan and to create more room for assets' growth, the Bank has raised Term Finance Certificates amounting to Rs 2.5 billion through Initial Public Offering and Private Placements during the later part of the current year 2007. This would enable the bank to meet its minimum capital requirement and maintain sufficient capital adequacy.
Despite the decline in the banking sector profitability in these 9 months, the outlook of the banking sector is still positive. The SBP has completely abandoned the facility of Forced Sales Value (FSV) and proposed 100% cash provisioning for NPLs, which is to be implemented from December 3, 2007. The profitability of the banking sector might be affected slightly in the coming years but fundamentals are still strong and banks will continue their earnings momentum in future.
Allied Bank in 2006 launched its internet product called "Allied Direct" that would cater to online transfer of funds on a large scale. Allied has pioneered in initiating this service on a large scale in this country.
The Islamabad Chamber of Commerce and Industry (ICCI) has urged the State Bank of Pakistan to take immediate measures for bringing down mark-up rates to single digit as the high interest rate was not only creating trouble for industrial concerns but was also making Pakistani goods uncompetitive in the global market. Therefore, the banks are being pressurised to bring down their mark up rates for the benefit of the trade and industry. Internationally the banking spread is between 1.5 percent to 2 percent maximum whereas in Pakistan the spread is 7.5 percent.
It is worth mentioning here that the profits of some big banks have now crossed the mark of Rs 100 billion and the industrial sector has claimed that there tends to be no check and balance on the banks. If SBP cuts down the rates, then the profitability of the banking sector may suffer. However, since Allied and some other banks are involved in foreign trade and offshore business, such a step may decrease the interest income but may stimulate the non-interest income.
Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
Disclaimer: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
ALLIED BANK LIMITED
BALANCE SHEET:
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Year 2003 2004 2005 2006 9 months 2007
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Assets $ $ $ $ $
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Cash and cash balances with treasury banks 9,443,478 10,842,435 14,742,504 23,039,577 22,446,362
Balances with other banks 1,761,896 1,477,282 3,292,038 1,705,445 922,895
Lendings to financial instituitions 15,361,237 16,175,000 5,777,382 19,050,239 15,155,520
Investments 40,734,616 57,262,834 44,830,058 46,953,241 79,923,588
Advances 40,659,158 58,799,702 110,946,972 144,033,634 143,491,047
Other assets 5,758,689 5,946,710 7,180,269 10,161,361 10,249,055
Operating fixed assets 2,596,133 2,548,375 4,720,344 6,445,111 7,201,722
Deferred tax assets 1,200,741 1,155,817 680,093 638,168 696,760
117,515,948 154,208,155 192,169,660 252,026,776 280,086,949
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Liabilities
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Bills payable 1,772,730 2,534,363 2,448,620 2,278,007 2,909,399
Borrowings from financial institutions 2,664,643 11,894,682 9,693,785 18,410,425 13,664,990
Deposits and other accounts 114,218,082 126,391,752 161,907,491 206,031,324 233,835,176
Sub-ordinated loans 0 0 0 2,500,000 2,499,500
Liabilities against assets subject to finance le 0 0 0 0 0
Other liabilities 2,834,969 3,066,594 5,084,528 5,119,267 7,130,391
Deferred tax liabilities 0 0 0 0 0
121,490,424 143,887,391 179,134,424 234,339,023 260,039,456
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Net Assets -3,974,476 10,320,764 13,035,236 17,687,753 20,047,493
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Represented by:
Share capital 1,063,156 4,313,156 4,404,642 4,488,642 5,386,370
Share premium 0 10,950,000 4,316,324 0 0
Reserves 557,876 574,703 1,019,899 6,133,209 6,065,519
Unappropriated profit/Accumulated losses -6,490,139 -6,323,707 1,658,829 5,607,796 7,011,680
-4,869,107 9,514,152 11,399,694 16,229,647 18,463,569
Surplus on revaluation of assets 894,631 806,612 1,635,542 1,458,106 1,583,924
-3,974,476 10,320,764 13,035,236 17,687,753 20,047,493
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Total Assets and Liabilities 117,515,948 154,208,155 192,169,660 252,026,776 280,086,949
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ALLIED BANK LIMITED
Profit and Loss Statement:
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Year 2003 2004 2005 2006 9 months 2007
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$ $ $ $ $
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Mark-up/return/ interest earned 4,984,607 5,177,989 9,846,657 17,215,507 15,868,154
Mark-up/return/ interest expensed 1,154,913 771,088 2,024,659 6,793,101 7,188,534
Net mark-up/ interest income 3,829,694 4,406,901 7,821,998 10,422,406 8,679,620
Provision against non performing loans and a 615,996 1,519,682 413,352 583,305 345,798
Provision for diminution -16,931 -26,832 17,014 -14,623 2,551
Bad debts written off directly 4,129 44,294 154,359 136,189 1,194
603,194 1,537,144 584,725 704,871 349,543
Net mark-up/ interest income after provision 3,226,500 2,869,757 7,237,273 9,717,535 8,330,077
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Non mark-up/ interest income
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Fee, commission and brokerage income 454,784 1,255,153 1,220,362 1,353,888 1,560,110
Dividend income 15,352 14,705 46,146 193,255 66,130
Income from trading in government securities 1,074,186 35,688 1,117 0 83
Income from dealing in foreign currencies 162,151 265,345 250,224 282,285 164,962
Income from sale &purchase of securities 124,273 14,008 123,266 376,792 955,736
Unrealised loss on revalutaion of investment 0 68 25,706 -30,180 -21,852
Other income 312,534 154,682 263,599 273,028 79,667
Total non-mark-up/ interest income 2,143,280 1,739,649 1,930,420 2,449,068 2,804,836
5,369,780 4,609,406 9,167,693 12,166,603 11,134,913
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Non mark-up/ interest expenses
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Administrative expenses 4,247,103 4,088,685 4,252,337 5,290,578 4,435,718
Provisions against other assets 1,736 150,179 39,828 205,307 89,868
Provision against off balance sheet obligatio 265,513 -93,427 79,095 2,546 27,688
Other charges 8,558 7,009 18,999 7,078 256,404
Total non-mark-up/ interest expenses 4,522,910 4,152,446 4,390,259 5,505,509 4,809,678
846,870 456,960 4,777,434 6,661,094 6,325,235
Reversal on account of depreciation charges of lan 107,189 0 0 0 0
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Profit before taxation 954,059 456,960 4,777,434 6,661,094 6,325,235
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Taxation - current 97,012 158,000 1,331,468 2,215,092 2,211,035
prior years' 209,089 28,000 22,000 0 0
deferred 262,378 102,690 390,594 48,752 -35,988
568,479 288,690 1,744,062 2,263,844 2,175,047
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Profit after taxation 385,580 168,270 3,033,372 4,397,250 4,150,188
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Weighted number of ordinary shares 106,315,565 226,192,614 440,484,115 448,864,115 538,636,938
Basic earnings per share - (Rupees) 3.63 0.74 6.89 9.80 7.70
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ALLIED BANK LIMITED
Key Financial Ratios
EARNINGS RATIOS:
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2003 2004 2005 2006 9 months 2007
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Return on Assets (%) 0.34 0.12 1.75 1.98 1.48
Return on Deposits (%) 0.35 0.14 2.10 2.39 1.77
Return on Equity (%) -10.31 5.30 25.98 28.63 20.70
Assets Quality Ratios
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2003 2004 2005 2006 9 months 2007
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NPL to Advances 0.44 0.26 0.11 0.07 0.07
Provisions to NPLs 0.03 0.10 0.03 0.06 0.03
Non Performing Loans 17,833,000 15,383,000 12,699,000 10,479,000 10,749,001
Market Value Ratios
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2003 2004 2005 2006 9 months 2007
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Price to Earnings 0.00 0.00 12.56 9.54 14.80
Market Value to Book Value 0.00 0.00 2.92 2.37 3.06
Debt Management Ratios
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2003 2004 2005 2006 9 months 2007
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Debt to equity -31.74 41.82 13.83 13.46 12.97
Deposit times capital -29.16 37.91 12.34 11.98 11.66
Debt to asset 1.03 0.98 0.93 0.93 0.93
Liquidity Ratios
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2003 2004 2005 2006 9 months 2007
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Earning assets to assets 0.81 0.84 0.85 0.84 0.85
Advance to deposit 0.39 0.41 0.59 0.69 0.61
Yield on earning assets 0.054 0.045 0.067 0.093 0.07
Cost of funding earning assets 0.012 0.007 0.014 0.037 0.03
Solvency Ratios
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2003 2004 2005 2006 9 months 2007
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Equity to assets (%) -3.25 2.34 6.74 6.92 7.16
Equity to deposits (%) -3.43 2.64 8.10 8.35 8.57
Earning assets to deposits (%) 85.35 95.17 101.91 100.99 102.02
Dividend Payout Ratios
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2003 2004 2005 2006 9 months 2007
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Dividend yield 0.029 0.048 0.039
Dividend cover 2.76 2.18 1.712
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